A Linchpin for Mortgage Competition

Special to CMT, By Mark Kerzner
President, TMG The Mortgage Group


competition-mortgage-industryHeightened competition generally leads to better products, more choice and lower prices. But, with the closure of certain key lenders, tighter lending rules and changing pricing strategies, the mortgage industry risks losing competition.

In the next few years, we could find that the broker channel proves essential to maintaining a healthy market balance. The reasons for that follow here.

 

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Interestingly, competition doesn’t always lead to the lowest rate or best deal in the mortgage and banking markets. Getting the lowest-cost mortgage also takes research.

When a consumer chooses to work with a mortgage broker, they are outsourcing this research (i.e., comparison shopping) to a qualified expert. The broker then uses his or her knowledge of the market, access to multiple lenders and evaluation of the client’s unique needs to identify suitable options.

On average, brokers deal with 5.9 lenders for each client, according to a 2005 Taddingstone report. These lenders all vie for the broker client’s business, which in turn fosters more competitive rates and products.

That competition also reduces each lender’s individual leverage.

Bank-methodsIn fact, research shows that a lender’s capacity to exercise market power on a borrower depends not only on differentiation from competitors, but also on the borrower’s ability to generate competitive outside offers. (A related report)

Recent studies find that consumers who use mortgage brokers save an average of 19 basis points on their interest rate. It’s surprising then that CMHC’s latest Mortgage Consumer Survey found that a whopping 73% of mortgage consumers still choose to not use a broker. In large part, this may be due to a lack of awareness about what brokers really do.

Mortgage brokers have long bridged the gap between lenders and consumers, but they became quasi-mainstream only in the late 80s. That’s when various trust companies (including FirstLine Trust, later a division of CIBC) and TD Bank, started using brokers as a variable cost alternative to in-house mortgage origination. In turn:

  • Lenders benefited from increased distribution without having to support a high fixed cost base (i.e., branches)
  • Consumers enjoyed bigger discounts off of bank posted rates. Through the discounted pricing model of brokers, consumers found significantly greater transparency.

In 2005, a report was released titled “Structure of the Canadian housing market and finance system.”  In it, Virginie Traclet, assistant chief of the Bank of Canada, wrote,

“As competition in the housing finance market became more intense…Canadian consumers benefited from increasing choice in terms of rate and term options and payment features for their mortgage loans.”

She named virtual banks and mortgage brokers as the market’s new competitors.

Traclet also discovered something else. She found that, even when banks started to aggressively discount off their posted rates (from approximately 25 basis points in the early 1990s to 125 basis points in the mid-2000s), their posted rates actually ended up increasing. In other words, greater “discounts” did not necessarily decrease consumers’ effective mortgage rates.

Mortgage-shoppingIn 2002, TD Canada Trust became the first big bank to adopt “no haggle” discounted mortgage rates. This was likely a strategic response to improve customer service through enhanced transparency. I also believe it was, at least partially, in response to the competitive nature of the broker and virtual bank channels. TD clearly saw these channels growing at an impressive rate. In fact, from 1997 to 2005, mortgage broker share increased from less than 10% to over 30%.

In recent years, we’ve seen lender numbers decrease, both inside and outside the mortgage broker channel. This is partly due to the recent global crisis which prompted some lenders to leave the Canadian market – including Accredited, GMAC, Wells Fargo, HSBC Finance, and others. It’s also the result of domestic lenders merging or shutting down certain business lines, including CIBC’s wind-down of FirstLine Mortgages, formerly the largest wholesale lender in Canada.

The rationale for CIBC’s decision was published in the Financial Post on June 10, 2012.

“… we are emphasizing our CIBC branded channels where we have an opportunity to deepen client relationships, have higher levels of client satisfaction and better NIMs (net interest margins). Our FirstLine brand does not support this strategy as the broker channel resulted in primarily single product client relationships.”

The term “better NIMs” implies greater profitability for the bank. This could come from additional cross selling, cost reduction, charging higher interest rates and so on. CIBC chose to focus on channels it believes can earn more profit.

Admittedly, this strategy may serve bank shareholders well. By cutting access to brokers and thinning the competition, banks can command higher interest rates. Yet, despite how banks position these moves (e.g., deepening “client relationships”), they reduce competition and could very well impact the value received by consumers.

Evidence shows that a strong broker market keeps lenders competitive and is in the best interest of consumers. Case in point is a report from the Bank of Canada that found:

“…borrowers are more likely to use a broker when there are many lenders. When there are many lenders, the [benefits] to hiring a broker are potentially higher since they have access to more options.”

Additional evidence comes from a separate Bank of Canada’s finding that banks do not treat all customers the same. Banks, for example, offer larger discounts to new customers than existing customers. They do so, again, to maximize profits when faced with reduced competition.

Canada has long been considered a country that puts the wellbeing of the collective ahead of the individual. Out of all the reasons to support mortgage brokers, perhaps the most compelling is that consumers are better off when the broker channel is strong.

History has shown that a formidable broker channel promotes lender transparency. This results in more aggressive pricing for all consumers, not just the best negotiators. Today, broker share hovers near 30%. One could imagine the savings to consumers if that number were closer to 50%.

  1. I probably wouldnt have the dream house i have now if it werent for a mortgage broker who got this naive boy a great deal back in the day when ‘my bank’ — as per those phony teevee commercials at the time — tried to rip me with a first, second, even a third mortgage with a rate over 20 per cent for the third….yikes…thank gawd for my broker….bless you my son…

  2. “On average, brokers deal with 5.9 lenders for each client, according to a 2005 Taddingstone report.”
    I sure hope brokers are sending their deals to an average of 6 lenders or the entire broker channel will shut down due to the huge cost of low funding ratios. It is the job of a broker to understand the client’s needs and chose one lender to submit the deal to.

  3. “…On average, brokers deal with 5.9 lenders for each client, according to a 2005 Taddingstone report.”
    Stale report…but how many of the 5.9 lenders were big banks or their affiliates?

  4. The trimming of fat makes room for muscle to be built…
    The exit of failing lenders who are not able to compete/survice makes it much more attractive for non-bank financial powerhouses to enter… a good example is CMLS Financial (a dominant player in the Commercial space) which is slated to enter in first quarter 2013… keep an eye out for them as an entrant that has proven they can give the banks a run for their money in the commercial space, and will no doubt have the same goal in the residential market, and broker focussed to boot.

  5. Nevermind…I see who the 5.9 must be. The CMT market share post states broker share is led by (60%):
    1. Scotia
    2. First National
    3. TD
    4. Street Capital
    5. MCAP
    So if we cut to the chase, Joe Consumer goes to a broker to get a quote for First, Street and MCAP. Presumably Joe Consumer can get the same transparent offer from Scotia and TD that a broker acting on his behalf would.
    Not an enviable position to be in. Like all middle men in Canada you have to work the soft benefits of “service”.
    Tough, tough sledding.

  6. I recall a statistic that most brokers send the bulk of their volume to three lenders. That doesn’t mean they don’t route elsewhere when rates and conditions warrant. To me, 5.9 sounds low. We have used at least a dozen different lenders this year alone.

  7. One of Mark’s statements can be interpreted 2 ways as evidenced to the written comments. Mark said “on average brokers deal with 5.9 lenders for each client.” When I first read it it suggests that each deal is submitted to 5 or 6 different lenders. Upon reading the report it said ” The study revealed that while brokers deal with an average of 5.9 lenders on a regular basis, 53% of a broker’s business is actually directed to the broker’s preferred lender.”
    An interesting comment was about TD Canada Trust offering no haggle discount rates in 2002 to clients. This policy apparently did not filter down to the branches or their London call center. Each year for about 4 in a row they offered me a rate before renewal. I still had to ask for a lower rate which they did give.

  8. Very well written article. Pretty simple concept.. brokers save you money now and later. Along with your family, friends, neighbours, golf pro, dance instructor, mechanic, pastor, fav restaurant manager, chiropractor, barista, wierd guy in the office that’s obsessed with his stapler ..Everybody wins with lower rates.
    Unfortunately some are still lured into a branch by a snazy green leather chair or dapper cartoon charachter in a bowler hat, just to sweat it out for an hour with a smiling face who’s job it is to find ways to charge you more money. ???
    Oh then theres your vet, cable guy, kid’s lacrosse coach, mail carrier ..and often those smiling faces from the branch who chuckle just before they fill in the Employer section of an application. lol

  9. How many times have you told this story of your past 2nd and 3rd mortgage? Probably 20 or more past posts on this site alone that I can recall. Pleaseee, get therapy because we don’t talk “crazy” here.
    Seriously, third mortgages at 20+%? how far back is that, 30 yrs? Breaking news just in, Gas was 50 cents a gallon in 1970!

  10. Talk about transparency, analyze the “5.9 lenders” all you want. Mortgage brokers help you. Period. I don’t care if more than half of them send the deal to their preferred lender. It’s still most likely substantially lower than what you’d find at a big bank. And yes, brokers do work with big banks, too. But we also know how to work with them, to get customers a better deal than they would flopping down into that comfy green chair on their own.

  11. Here’s a thought.
    70% of consumers don’t use a mortgage broker because they’ve found it more beneficial to deal directly with a bank / CU / trust.
    Half of a solution is defining the problem guys.
    Please consider that you’ve mis-interpreted the problem.

  12. A 20% 3rd (at a big bank) could’ve been 5 yrs ago and you know it. “Pleaseee” all you do is talk crazy Ivory Tower.

  13. Just looked at your site link and my F.I. beats or matches any of your rates just for the asking. No hard negotiations required!
    Your one trick pony is dead. What else you got?

  14. Good point. Also a recent survey concluded people were marginally happier with their banks service than a broker. Brokers need to work a lot harder to win business.

  15. That’s not really a fair statistic. Maritz found that only 33% of people know what brokers really do. If they truly grasped the value, broker share would be higher.

  16. I think I know the research you refer to. The prior year it said people were happier with brokers. The difference is within the survey’s margin of error, however, so I wouldn’t hang my hat on it if I were you.

  17. Why does one have to ask in the first place?
    How many clients walk away without ever asking?
    How many end up paying more because they never asked and find out after the fact?

  18. newsflash to the banker in the ivory tower….irritating guys like u with that old story is my therapy…..but i agree that banks are changing….moving forward..out of the pleistocene era

  19. Brokers have been mainstream for what…15 yrs???
    Your umbrella association should engage a consulting firm, pay the big bucks (1 mill+) and get a professional, objective assessment.
    Industry insiders doing self evaluations like this Kerzner piece don’t advance your agenda.
    Wouldnt you agree that after 15 yrs the mortgage broker show isnt all it should be?

  20. It’s sure easy to spot the branch reps and brokers here. There’s no grey area, if it wasn’t for brokers, branches would continue to rip people off like they have for decades. The extravagant advertising means less & less to increasingly savvy consumers.

  21. When brokers offer the best rates then banks are all bad. When BMO had a crazy low 5yr rate that couldnt be beat by brokers, then brokers looked at other reasons why it was a bad deal for conumers. I dont work for BMO, but brokers need to ask why the majority of consumers dont or wont use them.

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